$1.51 trillion total amount of household debt in canada in the first quarter of 2011: source: “a...
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$1.51 trillion
Total amount of household debt in Canada in the first quarter of 2011:
Source: “A Driving Force No More: Have Canadian Consumers Reached Their Limits”, Certified General Accountants Association of Canada
Credit Life Insurance
• In 2011, Canadians paid a total of $1.86 billion in premiums for credit life insurance bought through their financial institutions.*
• Obviously, people are concerned about leaving a debt burden to loved-ones upon death.
• Is Credit Life Insurance the best solution?
• Let’s compare with personal life insurance policy such as FlexTerm and FlexOptions.
*Source: Canadian Life and Health Insurance Facts, 2012 Edition, CLHIA
Which insurance do you want?
Who’s the policyholder?
Personal life insurance• You are the
policyholder.• As the policyholder, you
determine the beneficiaries.
• Beneficiaries are free to use the death benefit as they see fit.
Credit life insurance• The bank or credit
union is the policyholder.
• The bank or credit union is also the beneficiary.
Portability and Flexibility
Personal life insurance• Your policy stays in-
force even if you switch lender.
• You decide whether you want decreasing or level insurance.
Credit life insurance• If you switch lender,
you lose your insurance and have to apply with the new lender.
• Higher premiums when you switch.
• Will your health be the same at every switch?
• When it comes to protecting your mortgage in case of death, a personal insurance policy gives you the liberty to move your mortgage to take advantage of a better deal without worrying about:
–New and higher premium rates–New health issues that could affect your
insurability
Portability and Flexibility
Scenario – Moving the mortgage around
A 31-year-old individual gets a $200,000 mortgage from RBC with a 5% annual interest, 20-year amortization and 5-year fixed term resulting in payments $1,314 per month.
Five years later, at age 36, upon renewal, the individual switches his mortgage balance of $159,721 to Scotiabank. We assume the interest rate and payments remain the same.
Five years after that, at age 41, upon renewal, the individual takes his mortgage balance of $115,119 to TD Canada Trust for the remaining 10 years.
FlexTerm – 20 years
• Female non-smoker$4,882
(based on monthly premiums)
• Male non-smoker$5,832
(based on monthly premiums)
Level insurance amount
Banks* (over 20 years)• RBC – 5 years
$1,560• Scotia – 5 years
$2,017• TD – 10 years
$4,394• Total cost
$7,971Cost is the same for a man and woman.
Total premium cost over the duration of the mortgage
*Premium rates taken from each bank’s website on August 3rd, 2012. Sales tax apply to banks’ mortgage insurance in some provinces.
Scenario – Moving the mortgage around
Which insurance do you want?
Who can apply for life insurance?
Credit life insurance• Only the borrower (no one else!)
Personal life insurance• Anybody within the required age range can apply for
life insurance.Example• The new boyfriend who moves in the girlfriend’s
house can apply for life insurance even if the mortgage is in the girlfriend’s name only.
When does underwriting take place?Personal life insurance
• Underwriting process occurs at time of application.
• Field underwriting – broker starts process with medical questionnaire (further tests may be required).
• Clients know they’re insured once they start paying the premiums.
Credit life insurance• “Post-claim underwriting”
• Could result in nasty surprises and financial hardship as seen in certain news stories over the years.
Conversion
Personal life insurance• Convertible to permanent
insurance.• When temporary insurance
needs no longer exist, there are still reasons to maintain insurance protection:– Final expenses– Income replacement– Taxes– Legacy– Charitable donation– Etc.
Credit life insurance• No conversion options
Which insurance do you want?
Personal life insurance can cover more than the mortgage
• A mortgage is just one type of loan you don’t want to leave behind. Very often, there will be car loans, personal loans or lines of credits.
• With a personal life insurance like FlexTerm and FlexOptions, the amount of insurance is not limited to one loan.
• You are free to apply for the amount you want to cover all of your debts and other temporary needs such as childcare.
Examples of insurance needs other than the mortgage
• Other loans
• Home Buyer’s Plan reimbursements
• Daycare fees for kids
• Kids’ education
• Replacing income of deceased parent
• Etc.
Life insurance used to protect a collateral loan for business purposes.
Are life insurance premiums tax deductible?
Deductible Premiums - Conditions
• When a personal life insurance is used as collateral to secure a loan, the “Income Tax Act” (ITA) permits a limited deduction under the following rules:– The assignment of the policy must be required by the lender as
collateral for the loan.– The lender must be a bank, trust company, credit union, insurance
corporation or loan company.– The interest paid on the loan must be deductible in computing the
borrower’s income.– The amount deductible may not exceed the lesser of the premiums
payable and the “net cost of pure insurance” (NCPI) in respect of the policy.
Deductible Premiums - Conditions
– The amount deductible is that portion of the lesser of the premiums payable and the NCPI that may reasonably be considered to relate to the amount owing.• Example: Where the amount of the collateral life insurance is $500,000
and the average balance owing is $300,000, the deduction will be limited to 60% of the lesser of the premiums payable and the NCPI.
– The taxpayer seeking the deduction must also be the policyholder.
Other rules apply. To find out more, contact your life insurance provider.
Credit Insurance Premiums – Not Deductible
Based on the following rule:
The taxpayer seeking the deduction must also be the policyholder.
Credit life insurance premiums are not deductible because the owner is the financial institution selling the insurance. Therefore, the borrower is not the policyholder.
After taking into consideration all of this information,
which insurance do you want?
A better kind of mortgage insurance
Build-your-own term and disability insurance
Available terms: 15, 20 and 25 years
Available terms: 15, 20 and 25 years
Protection Decreasing Level
Minimum $50,000 $50,000
Maximum $4,000,000 $4,000,000
Premiums Guaranteed level Guaranteed level
Simplified Issue Up to $250,000 Up to $250,000
Rate banding$50,000 to $250,000
Over $250,000$50,000 to $250,000
Over $250,000
Beneficiary Chosen by policy owner Chosen by policy owner
Life Insurance
Conversion Yes, after 1st anniversary Yes, after 1st anniversary
Portable Yes Yes
Proof of loan Not required Not required
Renewable No Yes
Joint policy Yes, joint first-to-die No
Commission 35% FYC 45% FYC
Life Insurance
Age at issue : 18 to 65
Age at issue– 15-year FlexTerm 18 to 65– 20-year FlexTerm 18 to 60– 25-year FlexTerm 18 to 55
Life Insurance
Year T-15 T-20 T-251 1,000 1,000 1,000
5 813 882 921
10 508 689 792
15 500 500 619
20 0 500 500
25 0 0 500
Decreasing insurance coverage is based on a 6% mortgage loan.
Decreasing scale
The insurance The insurance amount stops amount stops
decreasing when decreasing when it reaches half of it reaches half of
the initial face the initial face amount.amount.
Disability InsuranceDisability Insurance
Your choice of disability benefit used as:
- loan payment replacement; or
- income replacement.
Loan Payment Replacement Income Replacement
Integrated to other DI benefits
No, DI replaces payment of loan. Yes, DI replaces income.
Age at issue 18 to 55 18 to 55
Minimum $300 $300
Maximum 1% of initial life insurance without exceeding $3,000.
1% of initial life insurance without exceeding $3,000.DI from all sources cannot
exceed 75% of average income from last 12 months.
Simplified issue Yes, up to $1,500 Yes, up to $1,500
Availability Only available with life insurance
Only available with life insurance
Proof of loan Required upon claim. Must be eligible loan.
Not required, not linked to loan.
Disability Insurance
Loan Payment Replacement Income Replacement
Waiting period90 consecutive days with
retroactive payment to the 61st day of disability
90 consecutive days with retroactive payment to the 61st day
of disability
Conversion Possible to convert to “Income Replacement” DI. N/A
Maximum amount of benefit
Lesser of:- Amount of DI specified in the policy; or- Sum of monthly regular payments (capital and interest) of all loans specified on the application that are active at the date of total disability.
Lesser of:- Amount of DI specified in the policy; or- An amount which, combined with other monthly income from all other sources during the disability period, does not exceed 75% of the average monthly employment income of the insured during the 12 months immediately preceding the date of disability.
Disability Insurance
Eligible loans for DI (loan payment replacement)
•Loans with a remaining duration of 5 years at the time the insurance application is signed and an initial amortization period of at least 15 years.
•Eligible loans include mortgage loans, personal loans, leases on an asset, Home Buyers Plan.
•Lines of credit and all other financial obligations with a variable or unascertained amount or reimbursement period are not eligible for DI.
“24/48”: Payment period ends after 24 monthly income payments for same disability or 48 monthly income payments for different disabilities or the end of the policy or, for the “loan payment replacement” only, the end of the loan if earlier.
DI Benefit Periods
Disability definition
Disability means a condition resulting from an illness, an injury or a nervous disorder that prevents the insured from performing his regular duties in regards to:
– the occupation in which he was engaged immediately before the date he became disabled;
– his principal occupation;
– any occupation for which the insured worked at least 20 hours per week for at least 8 weeks during the 12 months immediately preceding his total disability.
Get all the product details on Assumption Life’s Producer’s Corner
www.assumption.ca
Thank you!